Recent Judgments in Construction Arbitration

Arbitration is becoming a favored dispute resolution process in the infrastructure sector owing to the complexities of construction disputes. The challenges faced during construction disputes include high stakes of the infrastructure project, involvement of multiple parties, calculation of the quantum of damages, review and analysis of a large volume of data at the time of the dispute, and requirement of technical experts. These factors make arbitrations in the construction sector more demanding. With this background, we are delighted to share with you our newsletter on the recent judgments affecting the arbitration regime in the construction sector.

Person ineligible to be appointed as an Arbitrator cannot nominate an Arbitrator – this decision to have retrospective effect

In the case of Bharat Broadband Network Limited (“BBNL”) v. United Telecoms Limited (“UTL”), AIR 2019 SC 2434, a dispute arose between the parties and UTL invoked arbitration on 3rd January 2017. This called for the Chairman and Managing Director of BBNL to select a sole arbitrator as per the terms of the arbitration clause. Mr. K.H. Khan was appointed as the sole arbitrator on 17th January 2017. Subsequently, on 3rd July 2017, the Supreme Court ruled in TRF Ltd. v. Energo Engineering Projects Ltd., AIR 2017 SC 3889, that since a company’s managing director was one of the parties to the arbitration, he was ineligible to serve as an arbitrator and being ineligible could not nominate an arbitrator. Further, appointment of an arbitrator by such an ineligible person would be null and void. In view of this decision, BBNL made an application to remove the arbitrator from the proceedings. The sole arbitrator, however, rejected such an application. The Supreme Court relied upon the decision in the TRF Ltd. case and held that appointment of Mr. K. H. Khan as the sole arbitrator was void ab initio. The Court also held that ineligibility of arbitrator under Section 12(5) of the Arbitration & Conciliation Act, 1996 (“Act”) is de jure in nature which meant that the mandate of such an ineligible arbitrator terminated automatically. The Apex Court also held that the decision in the TRF Ltd. case had retrospective effect and would be applicable to all arbitrations starting on and after 23rd October 2015. It was also noted that parties could waive the objections to ineligibility of an arbitrator under Section 12 (5) of the Act but their waiver should be express and in writing. UTL’s filing of a claim statement before the arbitrator could not be considered to be a waiver of its objections to the ineligibility of the arbitrator.

Our Comments:

The sanctity of arbitration process depends upon the neutrality and impartiality of the arbitrator. Thus this judgment reinforces the fundamental principle of arbitration. Further, it clarifies that the appointment of an impartial arbitrator can be waived only by a clear written agreement where both parties are fully aware of the arbitrator’s legal ineligibility and not just by their implied behavior.

National Highways Act, 1956 will prevail over the Arbitration And Conciliation Act, 1996: SC

The Supreme Court of India in the case of National Highways Authority of India v. Sayedabad Tea Estate, Civil Appeal No. 6965-6966 of 2009 decided on 27th August, 2019 [2019 (11) SCALE 520] held that an application under Section 11 of the Arbitration and Conciliation Act, 1996 (1996 Act) for appointment of an arbitrator in relation to disputes with National Highways Authority of India (NHAI) is not maintainable in view of Section 3G(5) of the National Highways Act, 1956. Section 3G(5) of the National Highways Act provides for appointment of Arbitrator by the Central Government. In this case, the Appellant (NHAI) acquired land in Sayedabad Tea Estate for construction of Highways. The National Highways Act provides for acquisition and determination of compensation by the competent authority in accordance with Section 3G(5) of the National Highways Act. If the amount so determined by the competent authority is not acceptable to either of the parties then on application by either of the parties, the amount should be determined by the Arbitrator appointed by Central Government. The Respondent being unsatisfied with the award of compensation determined by the competent authority filed an application to the Central Government (CG) for appointment of an Arbitrator. The CG did not respond to request and then the application was filed to Chief Justice for appointment of Arbitrator invoking Section 11(6). The CG then appointed an Arbitrator as per Section 3G(5) of National Highways Act after the appointment of sole arbitrator under Section 11(6) of Arbitration & Conciliation Act. The question arose which of the two appointments made is valid. The Apex Court held that the expression ‘subject to’ as used in the Section 3G(5) clearly indicates that the legislation intended to give overriding effect to the provisions of the National Highways Act where it relates to the appointment of arbitrator to be made by CG. Therefore the SC held that Section 11 has no application in the present case.

Our Comments:

The essential element to file Section 11 petition for appointment of Arbitrator is absence of parties’ agreement to the appointment procedure or their inability to comply with the agreed procedure to appoint the arbitrator. The general principle in India is that special statutes override the general statutes. Hence, when entering into agreements with organizations instituted under a special statute, one must be aware of such special statute. This judgment reinforces the position that Section 11 will not operate if the parties have agreed for an appointment procedure mentioned under the statute.

Arbitrator fees agreed between parties will prevail over the Fourth Schedule: SC

The Supreme Court of India in the case of National Highways Authority Of India (Appellant) v. Gayatri Jhansi Roadways (Respondent), Civil Appeal No. 5383 OF 2019 with Gammon Engineers and Contractors v. National Highways Authority of India Civil Appeal No. 5384 of 2019 held that the Section 31(8) and 31A of Arbitration and Conciliation Act does not prevent parties from agreeing on a fee structure for the arbitrators. In this case, the Appellant entered into a contract dated 7th February 2016 with the Respondent. The contract contained an arbitration clause which stated that the fees should be paid to the arbitrators under the policy circular issued by National Highways Authority. Respondent moved an application for deciding the fees as per agreement of the parties. The tribunal considered the application and held that the fees shall be fixed as per Fourth Schedule of the Arbitration and Conciliation (Amendment) Act, 2015. The Delhi High Court in Gayatri Jhansi case held that arbitrator fees must be fixed in accordance with Fourth Schedule, irrespective of an agreement fixed by the parties. The Delhi High Court in Gammon Engineers differed with the findings of Gayatri Jhansi Judgement and held that deletion of words ‘unless otherwise agreed by the parties in Section 31A’ only signifies that parties, by an agreement cannot contract out of payment of ‘cost’. Thus the Delhi High Court held that the Arbitration and Conciliation (Amendment) Act, 2015 does not take away earlier position under the Arbitration and Conciliation Act and parties are free to agree on the fees of the arbitrator. The Supreme Court upheld the Gammon High Court Judgment on Section 31(8) and 31A and set aside Gayatri Jhansi High Court Judgment.

Our Comments:

The Judgment of the Court is appreciated as the Fourth Schedule of the Act is not mandatory but only suggestive in nature. Also, the mandate of the Arbitrator cannot be terminated if the arbitrator disregards the agreement between the parties regarding the arbitrators’ fee. This judgement respects the notion that the autonomy of the parties is the foundation of arbitration.

Former employee not disqualified from acting as Arbitrator: SC

The Supreme Court in the case of The Government of Haryana PWD Haryana (B and R) Branch v. M/s G.F. Toll Road Pvt. Ltd and Ors., Civil Appeal No. 27/2019 [2019 3 SCC 505] held that the former employee of one of the parties is not disqualified from acting as an Arbitrator. In this case, the parties entered into a concession agreement for construction works that contained an arbitration clause. Dispute arose and both the parties appointed retired Engineer-in-chief as their nominee arbitrator. Respondents raised an objection on the grounds that being a former employee, there are justifiable doubts regarding his independence and impartiality. Appellant requested the respondent no.2 i.e. the ICA (Indian Council of Arbitration) to appoint a substitute arbitrator within a period of 30 days. However, ICA had already appointed a nominee arbitrator on behalf of the Appellant, as well as the Presiding Arbitrator. Aggrieved by the appointment, appellant filed an application under Section 15 and Section 16 of the Arbitration and Conciliation Act, 1996 before the District Court, Chandigarh. The District Court and the HC dismissed the Petition on the ground that the Appellant could raise the issue of jurisdiction under Section 16 before the arbitral tribunal. Aggrieved by the order, the appellant filed the Petition before the SC. The Court emphasized on Section 15(2) of the Arbitration and Conciliation Act, 1996, which states that for any reason, a substitute arbitrator shall be appointed according to the rules applicable to the appointment of the arbitrator being replaced. Also, the present case is governed by the pre-amendment Act which does not contain any such ground for disqualification. The objection of reasonable apprehension of bias raised was wholly unjustified and unsubstantiated as the former employee retired 10 years before. Also, during the hearing, the counsel for both parties mutually agreed to the arbitration being conducted by a sole arbitrator.

Our Comments:

The Court was justified in rejecting the challenge as not every former employee can be disqualified from acting as an arbitrator. The threshold of justifiable doubts has to be met in order to remove the arbitrator.

Court should appoint the Arbitrator as per the terms of the Agreement: SC

The Supreme Court in the case of Union of India v. Parmar Construction Co., Civil Appeal No(s). 3303 of 2019 [2019 (2) ARBLR 328 (SC)], held that Court can appoint independent arbitrator only after resorting to the procedure prescribed in the arbitration agreement. In this case, the respondents contracted with railway establishment to undertake construction works of various kinds. The respondents raised a demand for escalation cost and the interest accrued thereon because the project was delayed due to breach of obligations by the appellants. In the meantime, the prices of raw material increased and hence appellants were requested to pay the enhanced escalation price. Dispute arose when the appellant refused to pay the escalated cost. Each of the respondents sent notice, invoking the arbitration clause which was declined by the appellant on the grounds that ‘no dues certificate’ has been furnished. The Rajasthan HC appointed an independent arbitrator without adhering to the mutually agreed procedure. Aggrieved by this, appellant filed a special leave petition in the Apex Court. SC granted the leave and observed that the independence and impartiality of the arbitrator was never doubted and that the requests deserve to be examined in accordance with the 1996 Act, ignoring the amendments of 2015. Further, the Court quashed the orders passed by the High Court. SC acknowledged that mere furnishing of no claim certificate would not take away the right of the parties. The appellants are directed to appoint the arbitrator (i.e. Railway gazette officers) in accordance with the 1996 Act in terms of clause 64(3) of the agreement.

Our Comments:

The Court should not wait for the application of challenge of arbitrator and should appoint an arbitrator which has less chance of justifiable doubts arising. The Apex Court should have considered the provisions of amendment act and not allow the Railway employee to be the arbitrator as having economic relation in past might affect the impartial decision of the arbitrator.